This (rather prescient and contrarian) Early Look was written on June 26, 2015 by Hedgeye Risk-Manager-In-Chief and CEO Keith McCullough. If you would like to leave consensus groupthink behind and begin your subscription click here.
“Take your pick as to when the story begins.”
Was it when Chinese growth really started slowing? Was it when #LateCycle sectors of the US stock market (Industrials and Transports) started to break down? Or was it when secular European #deflation started to “reflate”?
Was it a “technical” breakout in bond yields from levels very few fund managers thought we’d ever see (don’t forget that all-time lows in Global Yields were in Q1 of 2015)? Was it a “liquidity” move? Or was it both?
How about the latest no-volume-ramp in both US and European stocks? Was it the more dovish Fed (which Bond Bears had dead wrong)? Was it “Greece”? Was it both? Or neither? Take your pick.
Back to the Global Macro Grind…
As my French Canadian hockey roommate in college used to say, “the thing of it is, Mucker…” that whoever the establishment was and/or is supposed to be on Global Macro matters, they just don’t seem to matter much anymore.
The fact of the matter is that after all the storytelling, 6 months into 2015 the Dow/SP500 are +1-2%; Oil = range-bound; bond yields have ramped from 3yr lows (in January) to +23 basis points (10yr) YTD, and US earnings have slowed, big time.
Sure, you can tell me a story about “liquidity and technicals” … and until something drops like Chinese stocks just did (-7.4% overnight, -14.8% month-over-month), I’ll entertain it – because the “charts look good” and I’m just a really nice guy.
But, to be clear, chasing the momentum associated with what already happened (charts), isn’t a research #process. On that front, the biggest top-down factor to solve for is real (inflation adjusted) growth. So what’s your pick?
- US and Global Growth are going to accelerate from here through 2016 and beyond
- US growth accelerates sequentially in Q2, then slows (again) in Q3 and beyond
- European growth slows sequentially in Q2/Q3; Japanese growth accelerates Q2/Q3
I’ll pick 2 and 3 (because that’s what our GIP Models are signaling as the highest probability). For those of you who are new to considering our research and risk management process, GIP model stands for:
In meetings with Institutional Investors, I affectionately call this our government PIG model (GIP in reverse) because, essentially A) that’s what big central-planners are and B) they believe the P (policy) solves for the G (growth).
In reality, what we have learned in the last 5-10 years (after almost 600 “rate cuts” globally) is that:
A) When real-growth misses the perpetually optimistic government “forecast”,
B) Central planners ease (cut rates) and devalue their currencies… then that “policy action”
C) Reflates asset prices (cost of living in local currency terms) and slows real-purchasing power (spending)
If you want to retire from 2/20 and become a famous academic, spend the rest of your life telling the world a story that’s based on that (I’m too busy reading to write a book).
My name is Keith McCullough, and I write daily-non-fiction macro from a house on the lake in Northern Ontario (Canada).
Other than reading my rant right now, what do you do? Do you write? Or do you read what other people write? Can you, transparently and accountably explain, daily, what it is that you think is going to happen next and why?
I know. It’s hard. But so is life.
It’s even harder to spend your Global Macro life chasing consensus and big round “targets” like 3% GDP, Dow 20,000, and “the 10yr is definitely going to 2.75%, bro.”
Btw, that last one isn’t a joke. It must be making the rounds on the buy-side these days because I have heard 2.75% about two dozen times in the last 3 weeks from very sharp accounts (more when last price was at 2.54%, eh).
No, God doesn’t call with a level. And no, I don’t purport to know anything about nothing either.
All I know is that our Bayesian-inference research #process got us as bullish on real US growth (bearish on long-term Treasury Bonds) in 2013 as it’s getting me bearish on this #LateCycle (74 months in) expansion slowing into 2016.
Our predictive-tracking algorithm is implying a sequential acceleration in real GDP in Q2, then another big deceleration in Q3. Does that get the Bond Bears 2.75%? Maybe. But maybe not. And, more importantly, if it does, maybe it’s 1.75% after that.
Q2 ends in 5 days. And Mr. Macro Market will decide when the discounting of real GDP slowing in Q3/Q4 matters - not a research note that cherry picks the timing of what already happened.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.19-2.44%
Oil (WTI) 59.06-61.14
Best of luck out there today (and enjoy your weekend),
Keith R. McCullough
Chief Executive Officer